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An annuity is a type of retirement investment sold by an insurance company. A small business owner may choose to offer employees an annuity program as an employer-sponsored retirement plan. Nonprofit organizations are able to use tax-sheltered annuities to fund retirement plans, while all other businesses may choose an annuity provider as the administrator of the company 401k or SEP IRA program. Employers should consider the liquidity issues related to annuities prior to choosing an annuity provider.

Function

Annuities allow an investor to place money in an account in order to generate income at a later date. The Internal Revenue Service (IRS) recognizes tax-deferred annuities as a viable avenue for employer-sponsored retirement plans though they may also be bought individually from an insurance company.. As a result, an annuity can hold both pre-tax or post-tax assets. An annuity is offered through an insurance company, giving the account holder tax deferral on earnings. Contributions into employer plans reduce the annual salary of the employee and defer the taxes paid on the deposit until a distribution is given.

Age Requirements

Normal distributions can be taken starting at age 59 1/2. These are referred to as qualified distributions with the money added to the participant's annual income. Individuals who take the funds out prior to this age may pay an additional 10 percent tax penalty on the distribution. In this sense, the annuity is 100 percent liquid to the annuity owner, with the amount of taxes owed contingent on the owner's age.

Special Provisions

An annuity owner can avoid the 10 percent tax penalty on distributions under special circumstances recognized by the IRS. Annuity plan participants may access up to $10,000 from an employer-sponsored annuity to purchase a home. Participants may also access funds to pay for college tuition for themselves, a spouse or child. Additionally, employer-sponsored plans allow distributions to be made for medical expenses exceeding 7.5 percent of the participant's annual income as well as expenses preventing foreclosure or eviction. The distributions will still be added to the user's income but the individual will not be penalized.

Loans

The IRS allows an employer-sponsored annuity to grant participants the ability to take a loan against the annuity value. Participants may take out up to $50,000 or 50 percent of the value. This amount must be repaid with interest within five years. The interest is determined by the plan administrator. The loan is not taxed nor are the payments of principal or interest tax-deductible.

Surrender Charges

An annuity has a surrender charge associated with the contract. A surrender charge is a percentage paid by the participant for taking money out of the annuity prior to a designated term. Most annuities allow a maximum annual withdrawal privilege, often 10 percent. If the participant takes more than this amount out, the insurance company assigns a fee known as the surrender charge. The surrender period may be anywhere from one to 15 years, with reductions in the charges on anniversary dates. The annuity is 100 percent liquid after the surrender period expires.